Bondholders See No Gloom in Worst Slump: Poland Credit

Jan. 28 (Bloomberg) -- Poland’s economy is set to show the
weakest pace of expansion in three years, prompting investors to
bet the central bank will keep cutting interest rates and
prolong the biggest bond rally in a decade.

Gross domestic product grew 2 percent in 2012, compared
with 4.3 percent in 2011, according to the median forecast from
a Bloomberg survey of 33 economists before the data are
published tomorrow. Forward-rate agreements signal 89 basis
points in interest-rate cuts by October, while the extra yield
on Polish two-year bonds over similar German notes fell to 296
basis points today, the least in more than four years.

The European Union’s fastest-growing economy since the
onset of the global crisis in 2008 is slowing as rising
unemployment stifles consumer spending and exports decline to
the euro region, Poland’s biggest export market. While Governor
Marek Belka said Jan. 9 that the central bank may pause after
three consecutive rate cuts, Poland sold a record amount of
zloty bonds at lowest-ever yields last week as investors expect
more monetary stimulus.

“Weak economic activity should mean the rate-cutting cycle
will continue,” Di Luo, a fixed-income strategist at HSBC
Holdings Plc, said by phone from London on Jan. 25. “The Polish
bond market could record decent returns this year with the
central bank easing.”

Biggest Slump

Polish industrial output had its biggest slump in more than
three years and retail sales fell the most since 2005 in
December, reports showed this month, in a sign of deepening
downturn. The current slowdown will be “deeper” and last “a
little longer” than in 2009, when the economy grew by 1.6
percent, Jerzy Hausner, a member of the central bank’s Monetary
Policy Council, said on Jan. 24.

The government has called on the central bank to cut more
after it became the only monetary authority in the European
Union to raise borrowing costs last year. Policy makers should
demonstrate they’re capable of “quick reactions” to the
economic slowdown, Prime Minister Donald Tusk told reporters in
parliament on Jan. 25.

‘Protracted’ Downturn

Most central bankers “didn’t rule out” future rate cuts
if upcoming data confirm a “protracted” downturn, minutes of
the Jan. 9 meeting showed last week. Policy makers also agreed
that the economic situation didn’t warrant cuts of more than
quarter-point increments due to “risks” to inflation.
Consumer-price growth reached 2.4 percent last month, falling
below the bank’s 2.5 percent target for the first time since
August 2010.

“The cautious tone adopted at the January meeting was
premature,” Pasquale Diana, an economist at Morgan Stanley in
London, said in a Jan. 25 e-mailed report. “The upcoming drop
in inflation to around 1.5 percent by the second quarter will
persuade swing voters to support more easing.”

The central bank will reduce the main rate to 3.5 percent
in the second quarter, matching the record-low from 2009,
according to the median forecast in a Bloomberg survey of 18
economists.

The zloty has weakened after the central bank began cutting
interest rates. It’s retreated 3 percent against the euro since
the Jan. 9 reduction and touched a five-month low today. It
weakened 0.8 percent to 4.2025 per euro at 1:06 p.m. in Warsaw.

‘Selling Pressure’

“Monetary easing seems to weigh on the currency, and we
may even approach a new all-time low in terms of the key
interest rate,” Gunter Deuber, an emerging-market analyst at
Raiffeisen Bank International AG in Vienna, wrote in a Jan. 25
report. This “may trigger some selling pressure on Polish bonds
going forward.”

The extra yield investors demand to hold Polish dollar-denominated bonds rather than U.S. Treasuries fell two basis
points, or 0.02 percentage point, to 101 today, indexes compiled
by JPMorgan Chase & Co. show. The spread over German euro-denominated bonds narrowed two basis points to 227, according to
data compiled by Bloomberg.

The cost to insure Polish debt against non-payment for five
years using credit-default swaps grew one basis point to 83,
according to data compiled by Bloomberg. The swaps cost 76 basis
points less than the average for 15 emerging-market peers in the
Markit Itraxx SovX CEEMEA index, compared with 84 on Dec. 31.

The contracts, which decline as the perception of
creditworthiness improves, pay the buyer face value in exchange
for the underlying securities or the cash equivalent should a
government or company fail to adhere to its debt agreements.

‘Attractive’ Buy

The central bank will reduce the main interest rate to 3.25
percent from the current 4 percent, HSBC’s Luo said. Europe’s
largest bank recommends investors buy longer-dated rather than
short-term bonds and forecast total return of 6.3 percent this
year, according to Luo. Polish domestic debt earned 13.9 percent
last year, JPMorgan Chase indexes show.

“Everybody knows that the central bank is wrong and there
is no reason to expect higher rates,” Dmitri Barinov, who helps
manage the equivalent of $2.6 billion in emerging European debt
at Union Investment Privatfonds in Frankfurt, said in an e-mailed response to questions on Jan. 25. “So 10-year bonds
slightly below 4 percent are attractive.”